Alibaba’s IPOpen Sesame: Throwback Thursday

US and china working together illustration design over white

Alibaba’s IPO: Everything You Need to Know 

Hearing a lot about Alibaba in the news recently? Not sure who they are, what they do, or why Wall Street is making such a fuss about a company you’ve never heard of until now? Not to worry, Wall Street Survivor is here to help.

What is Alibaba?

Simply put, Alibaba is an e-commerce company based out of China. It was founded in 1999 by Jack Ma, and now includes several online vehicles.

  • the first Alibaba site, which serves primarily as a business-to-business marketplace and has customers globally (yes, even companies in the United States).
  • an online retailer with dedicated shops from brands all over the world…basically an enormous Amazon. The upside for the retailers? Access to the Chinese market. The upside for Alibaba? They take 5 percent of all sales.
  • Taobao: another e-commerce destination, but this time for consumer-to-consumer sales…basically an enormous eBay.
  • Alipay: an Alibaba owned payment platform for transactions done online.

So, imagine a company that offers the services of Amazon, EBay, and Paypal combined. It’s BIG.

It’s so big, in fact, that according to Forbes, itaccounted for 80% of China’s estimated $300 billion in online shopping last year.” Or, as explained by BusinessWeek, “A better measure of Alibaba’s power is the volume of merchandise sold through its various properties: $248 billion in 2013. Amazon did about half that; EBay, a third.”

What is an IPO?

IPO stands for “Initial Public Offering” and takes place the first time that a private company issues stock to the public. A company may choose to go public as either a method of raising capital, a way to return value to shareholders, or both.

Typically, an Investment Bank works with a company before listing to determine three key values: the company’s total worth, the percentage of the company’s total worth that will be made public, and the dollar value per share at which the stock will be sold. (These values are still being determined for Alibaba.)

But don’t take my word for it; let this helpful Wall Street Survivor video explain!

Why is this IPO a big deal?

Alibaba has plans to go public on the New York Stock Exchange after Labor Day, and Wall Street is primarily abuzz about it because of its size. This IPO is BIG. It has been valued at anywhere between $130 and $275 Billion and is rumored to raise more than $20 Billion in its initial offering.

To put that in perspective, Facebook made waves last year when they raised $16 billion. You did the math right; Alibaba is projected to raise 25% more. Indeed, $20 billion would make Alibaba the largest IPO ever… ousting current title-holder Visa which raised $17.9 billion in 2008.

Why do I keep hearing Yahoo’s name in Alibaba news?

Yahoo owns roughly 23% of Alibaba. As announced during their latest earnings release, they will sell 140 million shares when Alibaba goes public, which, depending on just how highly BABA is valued, should be a serious boost to Yahoo’s financials.

While considering that, according to the New York Times, Yahoo’s ownership of Alibaba contributes to more than half of Yahoo’s current market cap, you can see why YHOO stock owners are especially interested in the BABA IPO.

Before news of Alibaba going public was announced, many US investors had used YHOO shares as a way to invest in Alibaba . Good news for Alibaba meant good news for Yahoo. Of course, once the big day approaches, and investors can freely buy BABA shares outright, YHOO owners will have to start evaluating the success of Yahoo a bit differently. That’s why you are seeing headlines like “Marissa Mayer’s Post Alibaba Reckoning.”

How can you buy Alibaba shares?

Unfortunately only Institutional investors will have access to Alibaba’s shares before the IPO. However, once BABA officially hits the market, you will be free to buy shares via the NYSE on your online brokerage account.

Does it matter that the company is based in China?

Yes and no.

Yes, despite its origins in China, you will be able to buy and sell its shares as you do any other listing on the NYSE. However, Alibaba did have to go through some regulatory hurdles to secure that listing. For example, it had to incorporate in the Cayman Islands and utilize a “V.I.E.” or variable interest entity structure. This is why if you choose to buy BABA stock, your shares will read “Alibaba Group Holding Limited” and not “Alibaba China.”

But no, you will not be able to include BABA on purchases of several indices or mutual funds. Their Cayman Islands address will necessitate that Alibaba be excluded from the S&P 500, for example, which requires that its companies be held in the United States. Exclusion from the indices will also lead to exclusion from certain mutual funds; as the Wall Street Journal notes, “if a stock isn’t in a certain index, some funds can’t buy it.”

There are other factors making fund managers wary of BABA as well. The V.I.E. structure is considered risky by many, because Chinese courts have invalidated V.I.E. structures in the past. There is also a question of asset value, as a number of Alibaba’s assets will remain in China and not be owned by the “Alibaba Group Holding Limited” in the Cayman Islands.

Finally, there is Alibaba’s unusual structure for board appointments. In fact, it is partly this structure that led to Alibaba choosing to list in the United States at all. Per BusinessWeek:

“A unique stock structure, which gives the founders enhanced rights on board appointments, made it impossible for Alibaba to list on Hong Kong’s stock exchange, whose bylaws forbid such arrangements.”

What does this IPO mean for Chinese companies?

Although we won’t see for sure until BABA officially goes public, some analysts believe that Alibaba’s entrance into the market will hurt other Chinese companies. Because many portfolios allocate a fixed percentage for foreign companies; buying  Alibaba would mean selling  other Chinese stocks. Per Henry Guo of ABR,

“Funds tend to limit their exposure to individual countries, and they may have to sell some companies to make room for Alibaba.”

Of course, if Alibaba’s IPO is successful, it may lead to investors paying increased attention to the Chinese market as a whole. A rising BABA stock price could raise all other Chinese stocks like “a rising tide raises all boats.” It will be interesting to see how the sector reacts to this new behemoth in the market.

What is the outlook for Alibaba now and in a year?

Short term, Alibaba has begun looking westward, not only for their IPO but also for new customers. For instance, they have been investing in western, and specifically American, tech companies. Names from the likes of Lyft, Fanatics, and Tango have all benefitted from Alibaba support, presumably as the Chinese giant attempts to begin targeting the American consumer.

Long term, analysts foresee Alibaba continuing to expand its footprint on the ever-growing e-commerce space. According to Money Morning Executive Editor Bill Patalon,

“By 2020, China’s e-commerce market will be worth more than the United States, the United Kingdom, Japan, Germany, and France combined”

Sheesh, that’s some aggressive growth. And consider that this estimate only includes the company’s growth in China…imagine the numbers Alibaba will be putting up if it’s successful in its western expansion.

This is the bull case, of course. Some others worry that the regulatory concerns coupled with the current grand expectations will lead to a letdown once Alibaba hits the market.

Now it’s your turn, are you planning to get in on the Alibaba IPO? Have e-commerce titans like Amazon and EBay finally met their match? Let us know in the comments below.

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